Investing in life insurance is a foundational part of estate planning and, when done right, it is a primary way to say “I love you” to your loved ones after you are gone. However, when naming your policy’s beneficiaries, several mistakes can lead to potentially dire consequences for the people you are investing to protect and support.
The following are among the four most common mistakes people make when selecting life insurance beneficiaries.
1) Failing To Name A Beneficiary
Although it seems like common sense, whether intentional or not, far too many people fail to name any beneficiary on their life insurance policies or inadvertently name their “estate” as beneficiary. Both of these errors will mean your insurance proceeds must go through the court process known as probate.
During probate, a judge will determine who gets your insurance death benefits. This process can tie the benefits up in court for months or even years, depending on who the beneficiaries of your estate are under the law. Moreover, probate opens up the proceeds to creditors, which can seriously deplete—or even totally wipe out—the funds.
To keep your insurance proceeds out of court, make certain that, at an absolute minimum, you designate one adult as your primary beneficiary. In case your primary beneficiary dies before you, you should also name at least one contingent (alternate) beneficiary.
Ideally, we generally recommend that the primary beneficiary of a life insurance policy is the trustee of a well-considered and thoughtful trust agreement. Creating a trust and naming the trustee as your life insurance beneficiary will help provide maximum benefit and protection for your heirs.
2) Forgetting To Update Beneficiaries
While failing to name any beneficiary is a huge mistake, not keeping your beneficiary designations up to date can be even worse. For example, if you are in a second or third marriage and fail to remove an ex-spouse as beneficiary, you could leave your current spouse with nothing when you die.
To prevent having the wrong person listed in your policy, you should review your life insurance beneficiary designations annually as part of an overall review of your estate plan. As needed, you should immediately update your beneficiaries upon events like divorce, deaths, and births.
We ensure our estate planning clients have built-in systems to ensure their beneficiary designations – along with all other documents and decisions in their plan – are regularly reviewed and updated.
3) Naming A Minor (Or Their Guardian) As Beneficiary
It is never a good idea to name a minor as the beneficiary of your life insurance policy. In the State of Florida, minor children cannot receive insurance benefits or any other assets if the amounts received total more than $15,000. In the event a minor is listed as a life insurance beneficiary and the benefits exceed $15,000, the proceeds of your insurance will be distributed to a court-appointed guardian, who will manage the funds (often for a fee) and be required to file annual accountings with the court until the child reaches the age of majority – which is 18 in the State of Florida. At that point, all benefits are distributed to the beneficiary outright and unprotected. How many 18-year-olds have you met that have the knowledge and money management skills to handle a potentially large sum of money?
A court-appointed guardian is required to manage inherited funds for a minor child even if the minor has a living parent. A child’s living parent could petition to the court to be appointed guardian. However, there is no guarantee that a parent would be appointed, especially if the parent cannot qualify following a required background investigation. In many cases, a court could deem a parent unsuitable (if they have poor credit, for example) and instead appoint a paid fiduciary to control the funds.
Rather than naming a minor as a beneficiary, you may think to name the person you have chosen as guardian of your child. Unfortunately, that is not the right answer either. In that case, all insurance would pay outright to the named guardian, who could use the money in any way they choose, whether or not it is for the benefit of you minor child as you intended.
Instead, the right answer is to set up a trust to receive the insurance proceeds and name a trustee to hold and distribute the funds to the minor child when and how you determine and without the need for expensive and time-consuming court proceedings.
4) Naming An Individual With Special Needs As Beneficiary
Although a loved one with special needs is likely one of the first people you would consider naming as beneficiary of your life insurance policy, doing so can have tragic consequences. Leaving insurance directly to someone with special needs could disqualify that individual from receiving much-needed government benefits.
Rather than naming someone with special needs as a beneficiary, you should create a “special needs trust” or “supplemental needs trust” to receive the insurance proceeds. This way, the money will not go directly to the beneficiary upon your death. Rather, it would be managed by the trustee you name and dispersed according to the trust’s terms without affecting benefit eligibility.
The rules governing special needs trusts are complicated and vary greatly from state to state, so if you have a child with special needs, meet with us today to discuss your options. In the end, special needs planning involves much more than just life insurance—it’s about providing a lifetime of care and protection.
Eliminate Future Problems Now
While naming life insurance beneficiaries might seem simple, if you are not careful, you can create major problems for the loved ones you are trying your best to benefit. It is recommended that you work with an experienced estate planning lawyer to ensure you have done everything properly.
At Jacob & Greenfield, we will work with you to create additional estate planning tools like trusts—special needs or otherwise—to ensure your insurance proceeds provide the maximum benefit for your beneficiaries without negatively affecting them.
Schedule a no-cost initial consultation with us today to get started.
DISCLAIMER: This material was created for educational and informational purposes only and is not intended as legal, ERISA, tax, or investment advice. This information should not be used as a substitute for advice from competent legal counsel as laws change and the facts in your specific case need to be analyzed.
